Ohio loses appeal against rating agencies

State said pension funds suffered from actions

12/4/2012

COLUMBUS — Ohio’s attempt to hold the big-three Wall Street credit rating agencies partly responsible for $457 million in mortgage-based security losses suffered by public employee pension funds came up empty Monday.

A three-judge panel of the Cincinnati-based U.S. 6th Circuit Court of Appeals upheld a lower federal court’s dismissal of the lawsuit against Fitch, Standard & Poor’s, Moody’s, and Moody’s parent, McGraw-Hill Cos., that claimed the agencies became too cozy with the banks and other institutions that bundled questionable mortgage loans and sold them as investment vehicles.

Mortgage defaults and foreclosures led to a freefall in the value of those securities, which led to the failure of some Wall Street banks and the 2008 taxpayer bailout of others. That led to massive losses for four of Ohio’s five pension systems for teachers, police officers, firefighters, clerks, and other state and local employees

The lawsuit contended that the three credit-rating agencies had become “intimately involved” with the financial institutions. Because of the fees they charged the financial institutions, the lawsuit argued that the agencies had a vested interest in ensuring that mortgage-backed securities maintained their high AAA ratings.

It argued that the agencies were complicit in shielding risk associated with the securities from investors like the public pension funds.

The court, however, found the lawsuit’s claims to be too vague.

“The complaint describes these practices at a high level of generality,” Judge Julia Smith Gibbons wrote. “It draws its allegations from publicly available reports, newspapers, and magazines explaining problems with the agencies’ business model from 2005 to 2008.

“Although the complaint includes an exhaustive appendix of the 308 (mortgage-based securities) the funds purchased, no fact alleged in the complaint is connected to any particular rating given by an agency for a security the funds purchased during the period in question,” she wrote.

In 2009, then Democratic Ohio Attorney General Richard Cordray filed the suit on behalf of the Ohio Police and Fire Pension Fund, Public Employees Retirement System, State Teachers Retirement System, and School Employees Retirement System.

Now President Obama’s federal consumer watchdog, Mr. Cordray lost his re-election as attorney general in 2010. His Republican successor, Mike DeWine, opted to continue the suit.

His office said it is reviewing the court’s decision. It has the option of seeking a further appeal before the full 6th Circuit bench or the U.S. Supreme Court.

The California Public Employees Retirement System had beaten Ohio to the punch with a similar lawsuit filed in 2009 under its own law over $1 billion in losses. Earlier this year, a California Superior Court judge rejected a request from S&P and Moody’s to dismiss that suit.

Contact Jim Provance at: jprovance@theblade.com or 614-221-0496.